Here's a summary. First the pictures, then the words; first the past four years and then the current one.
A look at the past four years shows that both my assets and my debts climbed (with the exception of the year when the recession hit, when my assets fell). On this balance sheet graph, which gives a sense of overall context. the debts line actually looks relatively stable, but the actual amount of debt increase was significant and scary. That comes through better on the income statement graph below.
The debt ratio, by the way, is total debt relative to total assets, and shows an increase for the first four years of the period. Currently it is at about 25%, down from a high of close to 40%. My goal for the next year is to bring this down below 20%, ideally to 18%.
On this graph, you can see that, for most of the time during this period, my expenses outpaced my income, due to a 2.5 year period of unemployment combined with unusual, large expenses.
No amount of emergency fund planning that I might have done prior to this period would have been sufficient, and the financial planning literature I've read tends to significantly underestimate emergency needs as people, pets, homes, and durable goods age. Of course, I haven't read much financial planning stuff the past two years as I've been focused on finishing the CPA. The literature that I'm familiar with is from before the recession and overestimates expected retirement returns and underestimates expenses. I'm hoping that the recent literature is more realistic. (Not unduly pessimistic--realistic.)
The profit margin is net income (income less expenses) divided by income; here I just include "operating" income, i.e., salary, unemployment, and gifts, but not the investment income that accrues in my retirement accounts. As you can see, I had losses rather than income for most of the period.
As for the past year, you can note a turn-around on both graphs. This reflects a "bad" (sad) reason and a good one. The big increase in my assets is because my mother died and I had a bit of an inheritance; the recent increase in net income is because I worked a full tax season (lots of hours) back last winter and because I landed a full-time job with benefits this fall.
Hopefully the next time I do a five-year assessment, I'll be able to show annual profits (ideally, 10% for this next year and 15-20% thereafter) and a big reduction in debt.
5 year recap
December 19th, 2011 at 04:23 am
December 19th, 2011 at 04:52 am 1324270333
This is the thing I don't understand with the current economy. Well, I guess I do understand. Because cash is not earning any interest, emergency funds are recommended to be SMALLER than usual. "Cash is bad." I just don't understand how that mindset can prevail in these economic times. Emergency funds are not about the "interest." Anyway, you will find that nothing has probably changed the last two years. If nothing else, cash is very under-played as part of a solid/strategic financial strategy. At least, that is what I notice online. In real life, it's a different story. But I know a lot of "millionaire next door" types who probably keep far more cash than recommended. It has served them well, so hard to see the downside. (These aren't people who kept cash at expense of investing, retirement, and all that other stuff. You can do both, and be better off for it).
December 19th, 2011 at 04:55 am 1324270528
December 19th, 2011 at 08:02 pm 1324324952
December 19th, 2011 at 10:11 pm 1324332706
December 20th, 2011 at 12:58 am 1324342685